A fiduciary accounting is important for a number of reasons, but here is one example:
Suppose you create a trust for the benefit of your minor children with a significant amount of assets. You designate a relative as trustee to manage the trust assets and distribute the funds to your children for their education and support.
The trustee you appoint has a fiduciary duty to act in the best interests of your children. The trustee must manage the trust assets prudently. Also, the trustee must keep accurate records of all financial transactions and provide periodic accountings to the beneficiaries.
If the trustee fails to provide a fiduciary accounting or provides an inaccurate accounting, the beneficiaries (i.e. your kids) or their legal guardians won’t know how the trust assets have been managed and whether the trustee has fulfilled his or her duties. This can lead to mistrust and disputes between the trustee and beneficiaries.
On the other hand, if the trustee provides a clear and accurate fiduciary accounting, the beneficiaries can have confidence that the trustee has acted in their best interests and managed the trust assets properly. This can help maintain trust and goodwill between the trustee and beneficiaries and prevent disputes from arising.
The Importance of Fiduciary Accountings
Fiduciary accountings are important because they provide transparency and accountability. The law requires all fiduciaries such as executors and trustees to account for their actions. Only through a detailed accounting can we be certain that the trustee has fulfilled its duty to act in the best interests of the beneficiaries.
Components of a Fiduciary Accounting
Fiduciary accountings cover a wide range of financial transactions and activities related to the management of trusts and estates. These transactions include, but are not limited to:
This includes all forms of income generated by the trust or estate, such as interest, dividends, rental income, and capital gains.
This includes all expenses incurred in the administration of the trust or estate, such as taxes, legal fees, accounting fees, investment management fees, and trustee compensation.
This includes any distributions made to beneficiaries, such as payments for education, health care, or living expenses.
This includes all purchases, sales, and other transactions related to the management of trust or estate assets, such as buying and selling stocks or bonds.
This includes any loans made from the trust or estate to beneficiaries or other parties.
This includes any real estate owned by the trust or estate, as well as any transactions related to the acquisition or disposition of such property.
Tangible personal property
This includes any personal property owned by the trust or estate, such as art, jewelry, or furniture.
Accounts receivable and payable
This includes any money owed to or by the trust or estate.
How to Prepare a Fiduciary Accounting
Preparing a fiduciary accounting is a complex task. The complexity of the assets and transactions involved will determine the easiest way to prepare a fiduciary accounting. Fiduciary accountings are also regulated by state law, and you should consult with local counsel to make sure your efforts are in accordance with the law in your state. For example, in New Jersey, fiduciary accountings are governed by Rule 4:87 (actions for the settlement of accounts).
Here are some general steps to simplify the preparation of the accounting:
Organize financial records
Gather all relevant financial documents such as bank statements, investment statements, receipts, invoices, and any other documents that show transactions related to the trust or estate. Organize these records by month and year.
Determine the accounting method
Determine which accounting method is most appropriate for the trust or estate, such as cash basis or accrual basis accounting. This decision may depend on the size of the trust or estate, the type of assets involved, and the preferences of the beneficiaries.
Create a balance sheet
Prepare a balance sheet that lists all assets and liabilities of the trust or estate as of the beginning of the accounting period. This will provide a starting point for calculating income and expenses.
Determine all income received by the trust or estate during the accounting period, such as interest, dividends, and rental income. Be sure to include all taxable income and any income that must be distributed to beneficiaries.
Determine all expenses paid by the trust or estate during the accounting period, such as taxes, management fees, and other administrative expenses. Be sure to include all expenses that are deductible for tax purposes.
Prepare a statement of changes in assets and liabilities
Prepare a statement that shows all changes in the assets and liabilities of the trust or estate during the accounting period, including income, expenses, gains, and losses.
If distributions have been made, record the nature of each distribution in a schedule to the accounting.
Prepare a final accounting
Once all transactions for the accounting period have been recorded, prepare a final accounting that summarizes all activity for the period and provides a detailed report of all financial transactions.
A fiduciary accounting can be a complex undertaking and may require the assistance of an experienced accountant or attorney.
A fiduciary accounting is designed to provide a comprehensive record of all financial transactions and activities related to the management of the trust or estate, ensuring the fiduciary is fulfilling its legal and ethical obligations and that beneficiaries have a clear understanding of how their assets are being managed.